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Supply Chain Management

We have more broadly implemented our Quality First strategy. As a key element of our Quality First strategy, sustainability was assigned greater weight during our materials and supplier qualification, performance appraisals, and procurement decision-making. We strengthened cooperation in sustainability with customers, suppliers, and industry organizations. We also employed procurement quotas as a tool to help suppliers become more sustainable. All these efforts enabled us to minimize supply risks, increase customer satisfaction, and boost the competitiveness of the supply chain.

New Supplier Qualification

To be eligible to work with Huawei, our suppliers must be able to comply with applicable laws, regulations, and Huawei's Supplier Sustainability Agreement. We developed this agreement based on the Responsible Business Alliance (RBA), formerly the Electronic Industry Citizenship Coalition (EICC), Code of Conduct (Version 6.0) and guidelines from Joint Audit Cooperation (JAC). We have a comprehensive qualification process for all new suppliers, including suppliers' sustainability systems. This qualification process examines suppliers' capacity and their compliance with applicable laws, regulations, and the Supplier Sustainability Agreement. Those who fail the qualification for sustainability systems cannot be deemed qualified suppliers.

In 2017, we reviewed 76 potential suppliers in terms of their sustainability performance, and 17 suppliers that failed the review were denied the opportunity to cooperate with Huawei.

Supplier Risk Rating and Auditing

Every year, we audit suppliers, which combined represent 90% of our procurement spending, and assign them one of three priority levels: high, medium, and low based on sustainability risk. On this basis, a list of suppliers which require particular attention is drawn up. In 2017, we audited 1,088 suppliers with respect to sustainability risks, and conducted onsite audits on 117 suppliers of high- and medium- priority.

If we discover a problem during an audit, we help the supplier analyze root causes, identify ways to mitigate the issue, and take targeted actions using Huawei's Check, Root Cause, Correct, Prevent, and Evaluate (CRCPE) methodology. All problems are recorded in Huawei's Supplier Corrective Action Requirement (SCAR) system for follow-up until closure. We are always ready to help our suppliers improve.

Note: During supplier audits in 2017, we did not discover any instances of child labor or forced labor.

Supplier Performance Management

We appraise suppliers' sustainability performance annually based on their work performance, onsite audit results, and improvements over the previous year. The sustainability performance of a supplier accounts for 5–15% of their overall performance assessment. When we appraised the sustainability performance of tier-1 suppliers in 2017, we took into account how they managed their tier-2 suppliers. We encouraged our tier-1 suppliers to gradually establish a procurement CSR management system and regularly appraise the sustainability performance of tier-2 suppliers in line with the IPC-1401 Supply Chain Social Responsibility Management System Guidance. Suppliers are classified into four grades (A, B, C, and D) based on their performance. These grades represent their performance in descending order of acceptability. In 2017, we appraised the sustainability performance of 1,230 suppliers.

The amount of business we do with each supplier depends on their performance, which is also a factor considered in our tendering, supplier selection, portfolio management, and other processes. Suppliers that perform well are given a larger share in procurement and more business opportunities, while the reverse is true for low-performing suppliers, especially those who have crossed the line we draw for CSR. Depending on the situation, we instruct low-performing suppliers to fix existing issues within a specified timeframe and may even terminate business relationships with suppliers that display exceptionally poor performance. In 2017, we restricted the tendering rights or reduced the quotas of three suppliers as a result of poor sustainability performance.

Supplier Capability Development

We provide training and coaching for suppliers on a regular basis. We also encourage them to embed sustainability into their business strategies, helping them reduce business risks and enhance operating efficiency. Benchmarking the company against industry leaders and learning best practices are low-cost and efficient ways for capability development. In July 2017, to address the popular topic amongst suppliers of how to ensure factory safety, Huawei invited industry experts to a dedicated workshop involving representatives from 50 suppliers. We shared best practices in electrical fire detection, chemical safety management, risk assessment, and root cause analysis.

Representatives of suppliers at the security workshop

Global Supplier Sustainability Conference

In September 2017, Huawei convened its 8th Global Supplier Sustainability Conference. The event attracted 210 attendees from 75 suppliers, and representatives from our customers such as BT, Deutsche Telekom, Vodafone, and other organizations such as China's Ministry of Industry and Information Technology (MIIT), China Association of Communication Enterprises, and the Association Connecting Electronics Industries (IPC).

The theme of the conference was "Sustainability Creates Business Value". The Chairman of Huawei's CSD Committee addressed the conference, noting that "sustainability is an important part of Huawei's 'Big Quality' strategy. We have embedded sustainability into our Quality First strategy to effectively support our business success. Sustainability is a basic requirement of our customers. We view sustainability as an integral attribute of our products and the manufacturing process. We have integrated sustainability into our value chain to make our products and solutions more competitive."

Chairman of Huawei's CSD Committee is addressing the conference

Deepening Cooperation with Customers and Industry Organizations

We see sustainability as a key customer requirement, and embed it into our procurement strategies and processes. We work closely with customers on supplier management. For example, we invite customers to visit supplier facilities, conduct joint supplier audits with customers, and carry out employee surveys and supplier capacity building projects. All these efforts increase transparency across our supply chain and help improve our own sustainability. In 2017, Huawei and four customers ran onsite audits on eight suppliers, and we shared the audit results with the customers.

Driving Suppliers to Improve Through JAC

In 2017, Huawei designated four suppliers to participate in JAC joint auditing, with expert groups from a third-party auditing firm carrying out onsite audits. The auditing experts and customers expressed satisfaction with the results of the audits on the four suppliers. In particular, the suppliers were found to have incorporated CSR requirements into their internal operations. By making CSR improvements, the suppliers enhanced internal operating efficiency, customer satisfaction, and employee satisfaction. Suppliers were given a high score for their quick and effective improvements in the JAC auditing, and were recommended by two of our customers to attend the JAC CSR Forum held in Guangzhou in January 2018.

Huawei and representatives of award-winning suppliers at the JAC CSR Forum

In 2017, JAC launched the JAC Academy project, and provided training to suppliers on auditing methods, so that they can audit their own suppliers using the JAC method. JAC also established a platform whereby suppliers can share knowledge and best practices. Huawei fully supported the JAC Academy project, participated in project design, and shared our best practices in procurement CSR management system, onsite audits, and CRCPE.

We are enhancing cooperation with industry organizations, and promoting industry standardization as well as the development of a market-driven green supply chain: The IPC-1401 Supply Chain Social Responsibility Management System Guidance, an international standard whose development was led by Huawei, was released in 2017. The Manufacturer Green Supply Chain Management Guideline (GB/T33635-2017), a Chinese national standard developed with Huawei as one of the core contributors, was released in 2017.

Prohibiting the Use of Conflict Minerals

Huawei takes the problem of conflict minerals very seriously, and has released an open statement announcing that we will not procure or support the use of conflict minerals. We require all suppliers to not procure conflict minerals. We also ask our suppliers to cascade this requirement to their suppliers. Through the Responsible Minerals Initiative (RMI), formerly the Conflict-Free Sourcing Initiative (CFSI), we work with companies around the world to jointly address this problem, using the CFSI conflict mineral questionnaire and the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas to survey the supply chain and share results with our customers. In 2017, we shared the survey results with 15 customers. We are also an active participant in the projects of multiple industry organizations, seeking to jointly work out viable solutions to conflict mineral issues.

Huawei Statement on Conflict Minerals:

http://www.huawei.com/en/about-huawei/declarations/statement-on-conflict-minerals

As more cobalt is used in lithium-ion batteries in recent years, responsible management of the cobalt supply chain is attracting wider attention. Huawei attaches great importance to ethical procurement in the cobalt supply chain. In May 2016, Huawei joined the Responsible Cobalt Initiative (RCI) as one of the first core members. We are committed to driving the gradual resolution of CSR issues in the cobalt supply chain, through collaboration with upstream and downstream players, and with governments and non-governmental organizations. Huawei is active in RCI activities and proactively works to fulfill its obligations for responsible management.

• In 2017, Huawei released the Huawei Statement on Responsible Cobalt Supply Chain, stating our responsibility, action plan, and goals on the achievement of a responsible cobalt supply chain.

http://www.huawei.com/en/about-huawei/declarations/statement-on-responsible-cobalt-supply-chain

• Our Huawei Supplier Social Responsibility Code of Conduct includes guidelines on responsible cobalt management, and specifies that our suppliers must engage in due diligence in cobalt management.

http://www.huawei.com/en/sustainability/win-win-development/develop_supplychain/huawei-supplier-social-responsibility-code-of-conduct

• We have recently completed a series of surveys into the cobalt supply chain of lithium-ion battery suppliers, and these results will inform future targeted initiatives.

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